Illinois Secure Choice Retirement Savings Program Will Begin Assessing Penalties for Noncompliance in Late 2021

With the mandatory deadline passed on a phased-in registration for businesses, the Illinois Secure Choice retirement program announced it will begin assessing penalties in late 2021.
A man and woman work through paperwork to plan their retirement savings strategy.

The Illinois Secure Choice Retirement Savings Program (Secure Choice), which began as a pilot in 2018 and worked through various challenges that included a failed amendatory veto by the governor in August 2018 that would have made participation in the program optional for businesses, has passed its original mandatory deadline dates for businesses to register.

The program, which had a phased-in approach for various business sizes, requires businesses with 25 or more employees that have operated in the state for at least two years to offer workers a qualified retirement savings plan or register their workplace for Illinois Secure Choice.

The program recently announced that it would begin assessing penalties to businesses, starting in late 2021, for noncompliance. Businesses that don’t offer a plan and have failed to enroll in Illinois Secure Choice face a penalty of $250 per employee for the first year, escalating to $500 per employee for each subsequent year.

Here are what businesses need to know about Secure Choice so they can be prepared.

What is Secure Choice?

Secure Choice is a Roth individual retirement account (IRA) intended to help the 1.2 million workers in the Prairie State who lack access to employer-sponsored retirement plans. Under Secure Choice, businesses with 25 or more employees operating in the state for at least two years, and that don’t offer workers a qualified* savings plan, would:

  • Automatically enroll eligible employees. However, an employer that does not want to participate in Secure Choice can choose to offer its workers another qualified retirement savings plan;
  • Be responsible for distributing information about the program to all employees, facilitate enrollment, set up the payroll deduction mechanism, and ensure prompt transfer of employee contributions to the Secure Choice plan;
  • Not be able to make employer contributions to the plan
  • Not incur any costs to the employer.

*A qualified retirement plan includes a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).

Employees have 30 days to opt out of the program, but if they do not opt out they automatically will be enrolled at a contribution rate of five (5) percent. They also have 30 days to elect a deferral percentage (other than 5%).

Program designers expect the program to be self-sustaining, with no additional costs to the state outside of startup administrative funds.

Employer requirements and penalties

Employers are automatically required to withhold five (5) percent of an employee’s compensation (up to the annual maximum allowed for IRA contributions each year as provided by the IRS), unless the employee elects a different amount or opts out of the program entirely, and must remit those contributions to the Secure Choice program.

Employers who do not comply with the Illinois Secure Choice Savings Program Act could face a penalty of $250 per employee for the first year, escalating to $500 per employee for each subsequent year. The program has noted that it would like to work with employers to avoid penalties for noncompliance, and that any penalties would not be enforced until the end of 2021.

Why are Illinois and other states sponsoring their own retirement plans?

America faces a retirement crisis, as many people find themselves financially unprepared for their non-working retirement years. In response, states such as Illinois have begun establishing their own retirement plans.

In a 2015 report, the National Institute on Retirement Security (NIRS) found that the average working U.S. household has virtually no retirement savings. NIRS research reveals a median retirement account balance of $2,500 for all working-age households and $14,500 for near-retirement households. In addition, 62 percent of households age 55-64 hold less than a year's worth of income, far below what's needed to maintain their standard of living in nonworking years. Financial experts recommend that by age 67, a worker should have between five and eight times their annual salary saved for retirement.

What are the retirement savings options for Illinois businesses?

Registering for the Illinois Secure Choice program is only one way to fulfill the requirement that every qualified employee in Illinois have access to a retirement plan. As a compliant alternative, businesses can also establish their own employee retirement plan, such as a 401(k) or SIMPLE IRA, to satisfy this requirement. You should consider all available options before making a decision.

What are the differences among state-run IRAs, SIMPLE IRAs and 401(k) plans?

A state-run sponsored IRA is one way to satisfy requirements and help employees save for retirement. However, it's in businesses’ best interest to compare it with other financial options and decide which option best fits their needs and those of their employees.

The chart below shows key characteristics of a state-run IRA compared to a SIMPLE IRA and 401(k) plan, both of which Paychex offers. The biggest differences are the option for a company to match a portion of savers' contributions, and the maximum amount employees can contribute.

This article was previously updated April 18, 2019.

 

2019

State IRA

SIMPLE IRA
(Offered by Paychex)

401(k)
(Offered by Paychex)

Contribution Max

$6,000

$13,000

$19,000

Company Match Option

No

Yes, mandatory

Yes, at employer’s discretion

Tax Credits for Opening New Plan

No

Up to $500 per year, for the first 3 years

Up to $500 per year for the first 3 years

Employer Tasks

The employer processes payroll contributions, updates contribution rates, adds newly eligible employees, etc.

Paychex is the plan administrator

Paychex is the plan administrator

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